12/19/2012 4:00 PM ET|
Welcome to the new recession
It may not have felt like it, but stocks have been in a 4-year bull market. That's coming to an end as a new recession nears -- and in fact, may already be here.
It may be hard to believe, but the bull market is turning four years old. And from the looks of things, it isn't going to make it to its fifth birthday.
That's because, despite the nice little Santa Claus rally Wall Street's been enjoying over the last few weeks and rising hopes of a "fiscal cliff" deal in Washington, some serious warning signs for both the market and the economy are emerging. In fact, one of the most respected economic forecasters in the business believes we're already in a new recession.
If true, now's no time for aggressive optimism. Instead, it's time to move to cash and batten down the hatches for what looks to be a rough 2013.
I'll explain why in a moment, but first, let's review how we got here.
Following the Fed
Just as a wintry chill was setting in, between Thanksgiving and Christmas 2008, the economy faced an imploding housing market and financial-system meltdown. At the Federal Reserve, desperate policymakers decided to start using freshly created dollars to buy mortgage securities. This drive, which came to be known as "quantitative easing" or QE1, was expanded in early 2009 to include Treasury bonds.
Corporate bonds, which have been an area of focus for the average investor this cycle, responded right away. Stocks, initially disappointed by President Barack Obama's election, found their footing in the spring, and the bull market was on. The economy didn't respond until the summer, while the job market took a full year to begin turning around.
The year that followed was promising until a government bond crisis in Dubai revealed that developed governments were overextended. Then, the impact of U.S. stimulus spending faded. That was followed by Greece kicking off the ongoing eurozone woes. Central banks kept the economic ball rolling with an alphabet soup of programs that all amounted to the same thing: more cheap money.
Things slowed, job growth leveled off, and stocks have pretty much been sliding sideways since the Fed ended its second round of quantitative easing, known as QE2, in mid-2011. Investors have pulled out since then. The U.S. economy is barely moving forward.
So while the Standard & Poor's 500 Index ($INX) climbed more than 120% from its March 2009 low to its September 2012 high, there is evidence that the current bull market has run its course.
And now, the drag
With rich-world governments collectively set to tighten their budgets by 1% of combined gross domestic product, according to the International Monetary Fund (1.3% here at home, worth nearly $180 billion next year) more weakness lies ahead.
This fiscal drag is already baked in. It could be made worse by any turmoil related to the process, from a fiscal cliff breakdown here at home to ongoing political tension in Europe or a bond market revolt in Japan.
What's scary about all this is that the recent slowdown has happened despite very aggressive action by the major central banks. The Fed is currently engaged in unlimited quantitative easing (QE3 plus QE4) of $85 billion a month, saying it will continue until the unemployment rate falls below 6.5% or the inflation rate rises above 2.5%. The European Central Bank has threatened unlimited bond purchases if a country -- such as Spain -- requests help and commits to a budget-cutting plan. Prime Minister-elect Shinzo Abe of Japan has said he will push the Bank of Japan to engage in unlimited bond-buying. The Bank of England is pushing hard, too.
It seems the global economy just isn't responding to cheap-money stimulus anymore as the credit channel remains constrained. Governments and households are focused on paying off debts, not borrowing more cheap money, while banks are busy rebuilding their capital reserves.
The stock market doesn't seem impressed, either: The Dow Jones Industrial Average ($INDU) actually finished with a loss on the day the Fed announced QE4 -- the first time stocks have moved lower in response to a new round of quantitative easing.
Welcome to the new recession
In fact, the folks at the Economic Cycle Research Institute, who have made some remarkably prescient calls on the business cycle over the last few decades, believe we are already in a recession that started in July.
Corporate executives have pulled back on capital expenditures in a big way, sending ripples throughout the supply chain. Industrial production is on a downward glide path despite a temporary lift from Superstorm Sandy rebuilding. Small-business confidence has collapsed. Personal income is down. All are consequences of the fact that real equipment and software spending -- a proxy for capital spending -- has suddenly sliced into recessionary territory.
According to UBS economists, the recent lift in the job market is at odds with this, which is one reason I've been hammering on about the questionable veracity of the recent drop in the unemployment rate to 7.7%. A better measure of the job market, the employment-to-population ratio, is flat-lining near early 1980s levels. The disconnect is illustrated in the chart above.
Surprise, surprise. The drop in corporate investment and overall stupor of the global economy is starting to negatively impact corporate earnings -- which had been a rare bright spot over the past few years, thanks to strong foreign demand (from consumers in emerging-market nations) and the ability to make deep, harsh cuts to the jobs, wages and benefits offered to American workers.
You can see this in the way unit labor costs -- a measure of labor expense -- have stalled near prerecession levels despite the fact the economy has grown $312 billion over its prerecession peak to help push corporate profits to record highs.
That is what threatens the bull market.
VIDEO ON MSN MONEY
We can't save the world, so lets save ourselves. No budget no foreign aid no federal pay no welfare no euro its on its own sink or swim euro. No foreign company bailed no currency saved except our own.
50% tax increase on all overseas money.
Unrealistic wall street expectations so a limited few can reap obscene profits at the behest of honest business practices. You want to know where the jobs have gone? Look no further than wall street itself. And NOW "commentators" have the gall to say (paraphrase) "Watch out! Another recession is right around the corner!! It's Armageddon!" We didn't get nearly the blood out of that turnip like we thought. I call bullocks. Guy is probably partner in a hedge. Awww, only 40 % of companies exceeded "ANALYST EXPECTATIONS" for EBITDA. Too bad. Maybe we are trending out to a more normal pattern, coming out of a recession you tool. So sorry slow and consistent growth has been lost in your vernacular.
Learn why Republican are corporate FASCISTS.
Why are Republican protecting job outsourcing at the expense of our nation and our middle class?
Do you support these Republican filibusters?
Republicans will and have filibustered every attempt to create jobs here at home to protect their Fascist Corporate masters.
Republicans have declared war on decent wages and have declared war on the American middle class to appease their super-wealthy Fascist corporate bosses.
Bush cut taxes in 2001 and 2003. What followed was the greatest job losses in US history.
Proof that tax cuts for the rich KILL jobs and have set America on a course for doom.
Bill Clinton raised taxes in 1993 and the greatest job growth in US history followed proving that tax increases on the wealthy actually create millions of jobs.
Bill Clinton balanced our budget, wiped out deficit spending and started to pay down our actual debt.
Then America elected Bush and Rethugs that set America on a path to doom that our natiuon may not survive.
Republican policies kill nations. Including America, the most powerful nation in world history.
Republican greed has brought America to its knees and we may never recover.
Republican forced poverty and low wages and high unemployment caused by allowing Fascist corporations to outsource jobs overseas has caused a collapse of America's birthrates and is fast aging our nations population.
White, Black, Asian birthrates in America are at historic lows and will never recover in this wealth divided slave-wage/Walmart/Mcdonald's low paid nation.
Corporate Fascist Republican greed is so destructive to a nation that it is bringing down the world's most powerful nation.
Republican greed over country has proven thoroughly UNPATRIOTIC.
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[BRIEFING.COM] S&P futures vs fair value: -9.10. Nasdaq futures vs fair value: -19.50. U.S. equity futures trade sharply lower amid cautions action overseas. The S&P 500 futures trade nine points below fair value with some volatility expected around 8:30 ET when the Nonfarm Payrolls report crosses the wires. The Briefing.com consensus expects the report to reveal the addition of 220,000 payrolls in July.
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